A bridging loan is a short term asset-based finance that provides you instant cash flow. You can use these loans to fulfil your immediate financial needs and repay the amount when permanent or long-term financing becomes available.
For example, bridging loans help you by bridging the gap when you want to buy something but waiting for funds to become available by selling another thing. Like a mortgage, a bridge loan is a secured loan, and you must have a high-value asset to get it, such as land or property.
When considering a bridging loan, one important thing to consider is its viability. The interest rate is the primary indicator that shows whether a loan is feasible or not. Here is a complete guide about the interest rates and costs of bridging loans.
Interest Rates Of Bridging Loan
The interest rates on bridging loans are usually high. Typically the monthly interest rates are between 0.5 to 1.5%, which turns out into an Annual Percentage Rate (APR) of 6.1% to 19.6% that is higher than any mortgage loan.
Due to the short term nature, the interest rate on bridging loans is charged monthly rather than annually. The interest rate can be fixed or variable. In fixed-rate loans, the interest rate remains the same throughout the loan term.
While in the variable interest rate, the lender changes the interest rate according to the Bank of England rate, which means the end payment can go up or down.
You can pay interest monthly, and the amount will not add to your bridging finance at the end.
You can borrow the interest rate for a specific period and then repay at the due date.
In this type, you pay the interest rate at the end of the loan term.
Some lenders allow you to pay off interest rates using a mixture of the ways mentioned above. For example, you can choose retained interest for the first 3 or 4 months and then pay monthly.
What Is APR?
APR is the Annual Percentage Rate. It is the interest rate that a bank or lender offers with the loan. APR does not only include the interest rate of the loan but also includes all the fees included.
Thus, whenever looking for a bridging loan, you should look at the APR so that you can make a better decision whether you can afford to take out a loan or not.
Factors Influencing Bridging Loan Interest Rate
There are many bridging loan providers in the UK. A common factor between all the lenders is that they charge monthly interest rates. The interest rate varies from as low as 0.29% to as high as 2% per month. This interest rate depends on several factors, including:
1. Type Of Property
The property borrowers use as security can be residential, semi-commercial or commercial. The residential property is considered less risky by the lenders and thus have low monthly interest rates.
Semi residential properties such as shops along with living accommodation are also considered low-risk security. In contrast, commercial properties and this level of risk reflect the monthly interest rate of bridging loans.
2. Condition Of Property
Generally, the property that is not suitable for a mortgage is also accepted by the bridging loan lenders. But the amount of work that a property requires and the property’s condition affects the loan rate.
3. Loan To Value
The more equity provided by the lender, the lower the risk to the lender and thus, the monthly interest rate will also be less. The lender assesses the risk based on the value of property and equity in the property. Therefore, the lower the risk, the lower the loan will be.
4. Loan Term
The amount of time for which you are lending money determines the bridging loan rate. Usually, the loan is offered for up to a year, but some lenders offer loans beyond this term.
5. Type Of Legal Charge
If your bridging loan is a first charge loan, the interest rate will be low compared to the second charge loan.
Other than that, your credit history, location of property and affordability also affect the loan rates. If you want to get the best loan rates, you must take quotes from different bridging loans companies, make price comparisons, and select one that offers the best rates.
Mortgage Vs Bridging Loan
Like any other loan, whenever you think of taking out a bridging loan, it is vital to consider the overall cost of the loan.
In a conventional mortgage, you may sign an agreement that has 25 years terms, but a regulated bridging loan has loan terms of up to 12 months. With a mortgage, you have to pay the interest rate for a longer period of time, while the bridging loan rate is only for a number of months.
In this aspect, a mortgage can be sometimes more expensive than a bridging loan.
Different Bridging Loan Costs To Consider
When taking out a bridging loan, you need to consider many costs other than the interest rate. It is because all these costs, in the end, add up to your bridging loan cost.
The best way is to compare quotes from different lenders and understand what a bridging loan will cost. To calculate the actual cost of a bridge loan, you should add up the interest rate to all the other charges involved in it.
Following fees can be included in your bridging loan.
1. Interest Roll-Up
Generally, the interest rate on bridging loans is charged monthly, but some lenders provide you with the option to have interest deferred, retained or rolled up. In this case, you do not pay monthly interest, and it is paid at the end of the loan term.
2. Arrangement Fee
3. Administration Fee
Most lenders include an administration fee into their agreement that is added to the cost of a bridging loan.
4. Legal Fee
Your bridging loan lender charges a legal fee for setting up a facility for you. It can vary from lender to lender.
5. Valuation Fee
A valuation is required before setting up most bridging loans. The lender visits your property to find out its value to ensure that it is worth the amount you want to borrow.
This fee is not added to the loan amount, and it is an upfront fee that you have to pay to the lender or the surveyor when he comes to your property for valuation.
6. Exit Fee
Some lenders charge an exit fee that is similar to the arrangement fee, but it is charged when a loan is redeemed.
7. Broker Fee
You can take a loan from a direct lender or through a broker. When you choose a broker, you have to pay a fee to the broker for finding a lender and arranging bridging finance for you.
How Much Does A Bridging Loan Cost?
Usually, the cost charged by bridging loan providers is higher than the traditional types of fundings. As a result, it makes bridging loans an expensive way of borrowing. A loan provider may charge an interest rate monthly or offer different options to cater for your needs.
People often focus only on finding the lowest interest rate and decide to take a loan based on the interest rates offered. When you are looking at the cost of bridging loans, you must keep in mind that some lenders make the cost high by adding exit fees, management fees, arrangement fees and others.
The lenders do not make it clear initially, so you must ask them about all the charges before making any final decision. If you are lending from a broker, you should also ask whether there are any broker fees.
Some lenders have a bridging loan calculator on their websites that will help borrowers understand the costs involved and the total borrowing cost according to their loan requirements.
How Can You Get The Best Rates?
The average cost of the bridging loans varies with the lender and whether you have poor or good ratings.
An important key to getting the best bridging loan rates is to shop around, have whole-of-market access, and meet the lending criteria of as many lenders as possible. So that if you can not find a bridging loan quote of one lender suitable, you can go to another lender. You can get the best rates bridging loans if you have:
- Good credit score
- A viable exit strategy
- A valuable property as collateral
- Experience in property
How Much Can You Borrow From a Bridge Loan?
Bridging loans are short term debts that can solve time-critical property purchases. The amount you can borrow through bridging loans depends on your circumstances and a number of factors, including:
1. Your Lender
The amount you can borrow through a bridging loan mainly depends on the borrowers you choose. Different lenders offer different loan amounts and terms.
You have to research and shop around to find a lender that meets your requirements. It might take a lot of time. We suggest you use comparison sites to get a quick comparison of bridging loan lenders. It will save you time and effort.
2. Valuation of Property By the Lender
The value of your property directly affects the amount that you can borrow using bridging finance. Your lender also charges a valuation fee and visits your property to find its market value.
If you have a property in poor condition or one that is considered non-standard, you can borrow only a small amount. However, if your property is of good value, you can secure a huge amount of money.
3. Loan To Value Ratio
When lenders assess your loan application, loan to value is one of the major factors that they consider. It is a key consideration for lenders to calculate the amount that they can lend to a borrower.
Usually, you can take a maximum loan to the value of 75% of the value of your property. If you are taking out a first charge bridging loan, you can borrow m0ore compared to a second charge bridging loan.
4. Your Financial Circumstances
Although bridging loan providers are not highly concerned with your income or credit score, it is necessary to carry out a soft credit check. It makes sure that they are lending money to borrowers who can repay it timely.
Borrowers with high credit scores are considered low-risk borrowers, and they can take out more money compared to borrowers with low credit scores. It is because the borrower’s credit score is an indicator of his ability to repay the loan amount.
Therefore, if you want to secure a huge amount through bridging finance, you should improve your credit score.
5. Location Of Property
How much you can borrow also depends on the location of your property. If your property is located in an isolated rural area, it can be difficult for lenders to find a buyer in case they have to sell the property.
So the property’s location can make your loan application approval difficult, and also, you may not be able to get the amount you need.
How Much Does It Take A Bridging Loan?
It is fairly quick to apply for a bridging loan. After comparing different loan providers, it’s time to make your loan application when you choose one for you.
Usually, your application will get approved within 24 hours. Once your application is approved, you can get funds in your bank account within two weeks. It is a time that is required for valuation of borrowers property, credit check and transfer of funds. If you want to get your loans sooner, you may have to pay extra to proceed faster with your bridging loan application.
Moreover, you can get loan approval quickly if you meet the eligibility criteria (a valuable property to use as collateral and a viable exit strategy).
Whenever you think of taking out a bridging loan, you must look at all the fees other than the interest rate so that you can estimate the correct cost of borrowing.